De Havilland Aircraft Company

Executive Summary

De Havilland is an Aircraft company founded in 1928. In March of 1992 De Havilland was purchased by Bombardier Inc (51%) and the government of Ontario (49%).  Due to high manufacturing cost, De Havilland is trying to implement a new cost reduction strategy by partnering with a smaller base of suppliers and utilizing long-term contracts.

De Havilland sent out RFQs to nine suppliers and the Financial Analyst, Kim Tomar was responsible to evaluate and recommend the candidates. When comparing price, one of the suppliers, Marton Enterprises had pricing that was less expensive by $2, 061,180 compared to the current provider, Dollard Plastics. De Havilland had approached Dollard and asked for a 25% discount; however, they disagreed and didn’t provide any counter offer.  De Havilland was hesitant to switch to Marton as the company did not provide financial information, and was in question as to whether they would be able to support all of De Havilland’s inventory needs.  Furthermore, the wide range of low pricing from suppliers was in question as there could have been misinterpretation of the terms and agreement for the bid. De Havilland will need to clarify that Marton is able to perform the duties on a long-term basis and is able to provide and perform up to the service levels to meet standards.  To mitigate risk, it would be recommended that De Havilland acquire Dollard Plastics for one year while awarding Marton the majority of the production of the flap shrouds and bay doors.  De Havilland will monitor Marton using KPI’s on a quarterly basis and discuss any changes if required.

Issues Identification

Bought by Boeing in 1986 and sold in 1992 to Bombardier Inc. and the Ontario government, De Havilland has established itself as a major player in the Canadian aircraft manufacturing industry.  To continue growth and success, De Havilland reviewed and identified areas to improve financial strength and discovered that parts such as the flap shroud and bay doors for the airplane accounted for 60-65% of total manufacturing costs. The high manufacturing costs presented a challenge as the effort for receiving any discount for the flap shrouds from the supplier, Dollard Plastics, has been rejected.  Lakeside Industries supplied the bay doors but was not locked into a long term fix price agreement.  De Havilland has concerns over their large portfolio of vendors that would stop them from capturing economies of scale and recognizes the need to commence long term contract and simplify their purchasing structure.

The Bidder Selection Board developed a list of potential bidders for the flap shroud and bay doors and sent RFQ packages to each.  There was a wide range in pricing between the suppliers; however, a bid received from Marton Enterprises provided a very significant cost savings relative to Dollard Plastics.  At this point, the challenge for De Havilland is going through an analysis to determine the right supplier by evaluating price and the reliability of the supplier to committing to a contract with the company.

Environmental & Root Cause Analysis

De Havilland is soliciting suppliers who can supply the required parts for the best possible value while developing long-term relationships with vendors to ensure a stable costing structure. 

The response from the bid received from the nine different suppliers showed a wide range of pricing, this poses a concern as to whether the criteria and specifications sent out by De Havilland was a clear message to the suppliers.  A misunderstanding from the supplier will cause inaccurate quotes and cause additional time to further investigate the suppliers.  One of the lowest bids was from Marton Enterprises which represented approximately $2, 061,180 cost savings compared to the current supplier Dollard Plastics.  De Havilland tried to renegotiate their existing contract for the supply of flap shrouds with Dollard Plastics at a reduction of 25% from the original price; however, Dollard refused to reduce their prices.  The response from Dollard Plastic represented that they were not interested in a long term relationship or a cost reductions as they did not counter with any offer.  

As Marton Enterprises had the lowest price, they posed to be a contending supplier for De Havilland; however, the low pricing raises various questions.   Marton’s low cost raises the question as to whether they run their company more efficiently to enable lower costs or if the quality of the material being supplied is of poor quality.  There is the possibility that Marton is trying to buy the contract and make up the difference in other services such as transportation and support.  While Marton provided much more data information and their costing of parts, their financial information was missing.  De Havilland is relying that Marton is stable enough to use as a supplier because they are part of Devon Holdings, a publicly traded company; this could be a risk as there is no actual financial information about Marton.

Another challenge is that De Havalland and Marton Enterprises have parent companies that can pose as a risk as they can have an impact on the final decision making; relationships or political reasons could potentially influence or present barriers or roadblocks.  Furthermore, Marton has put a time limit of 120 days for acceptance; this puts a lot of pressure for De Havilland as their purchasing structure takes a long time to thoroughly analyze deals and it eliminates other possible contract negotiations with other suppliers

Alternatives

Alternative 1

Select Marton Enterprise as the only supplier. De Havilland will need to complete negotiations with Marton and do a full facility check to see if they fully equipped and inspect the quality of the product before committing a long term agreement. Financials will need to be required to determine that Marton is not at risk and is a stable business.

Advantages

• Possibility of better communication and aligned goals because of one supplier
• Possibility to arrange for improved relationships
• Low cost for manufacturing product
• Long-term fix contract enabling less time spent on annually negotiating contracts and stability in costs
• Purchasing from one supplier allows for economies of scale and possibility better lead times

Disadvantages

• If there are any incidents i.e. fire at Marton’s manufacturing plant De Havilland could be at risk because there is only one supplier
• Quality of product may not be same
• May take long to build a good relationship with supplier defining needs, service may not be as promised

Alternative 2

De Havilland can pursue the first option but with a modification; give Marton 80% of the work for the first year and keep Dollard Plastics under contract for the remaining 20% of work. Once De Havilland sees the capability of Marton and inspects the quality of their product, it would then be advised to give 100% of the business to Marton.